The VAT, or Value-Added Tax, is a value-added tax on purchases.
As a value-added tax, only the final consumer pays the VAT – purchases by business at other stages of production do not pay VAT (they are charged VAT, however, those charges act as a credit against the VAT they charge)
What formula do I use to calculate VAT?
There are two formulas that are useful for VAT calculations:
How to add VAT to a price
To calculate the amount of VAT to add to a price, we first need to calculate the multiplier. Currently VAT is at 14%, therefore:
14 divide by 100% = 0.14
0.14 + 1 = 1.14
The multiplier is 1.14
We can now use this multiplier to calculate VAT that should be added to a price.
If you have a product you are selling for R100, you can calculate VAT by taking the product price and multiplying it by 1.14:
R100 x 1.14 = R14
Therefore the VAT you would charge on your R100 product would be R14, giving you a VAT-inclusive price of R114.
How to subtract VAT from a price
To calculate an amount before VAT from a VAT-inclusive price, we need to use a divisor. This divisor is calculated using the current VAT rate of 14%.
14 divide by 100% = 0.14
0.14 + 1 = 1.14
The divisor is 1.14
If our VAT-inclusive price is R114, we take this amount and divide it by 1.14 to get our price before VAT of R100.
How is VAT calculated?
The SARS website describes this succinctly:
Deduct input tax from output tax liability and that will result in VAT payable or VAT refund.
To explain this in more detail, your output tax can be thought of as VAT you have collected on behalf of SARS. This is VAT you have added to the product or service you sell and you are only holding this money temporarily until the due date for VAT payments.
Input tax on the other hand is VAT that you have already paid and an amount that SARS owes you. For example any business expenses for which you hold a valid tax invoice.
VAT control is a summary of VAT inputs and VAT outputs and indicates if your business is required to pay in VAT or is owed VAT from SARS.
Other VAT terms that may affect the calculation of VAT include:
Zero-rated items
As the name suggests, these are services or goods that are taxed at a rate of 0%. Examples are maize, fruit, brown bread, etc.
Standard-rate items
These are goods or services taxed at the rate of 14%.
VAT-exempted items
These are services that are exempt from VAT at either the standard rate or zero rate, for example childcare services.
For more information about VAT in general, read our VAT article here that covers VAT vendors, VAT inputs and outputs, understanding VAT as a tax and more.
If you would like to find out about who needs to register for VAT, read our VAT SARS article.
Should you need assistance with your business VAT, contact Dirmeik Consulting on 021 421 4444. We offer services that not only assist you with your VAT calculations but can also add value in all areas of your business. Speak to us today!